Income Inequality And Wage Stagnation

. . . I should say that I don’t buy the idea that inequality and stagnant wages, bad as they are, are responsible for the financial mess. You can have a fully employed economy producing disgusting luxury goods rather than middle-class necessities; it’s not nice, but it can work.

Perhaps that is true regarding the financial crisis, but is it true regarding our economic crisis? In the modern American economy, as Krugman himself notes, consumption is 70% of GDP. Even if the long term goal is to increase savings (also known by economists as "investment"), in the short term, can we have an sustainable economic recovery that does not cut income inequality and reverse wage stagnation? More . . .

It is basic Keynesian Depression economics that in a depression environment such as the one we currently face, the only way to stimulate aggregate demand is through government spending. In his column today, Krugman berates the German government for not accepting this Keynesian postulate:

So here’s the situation: the economy is facing its worst slump in decades. The usual response to an economic downturn, cutting interest rates, isn’t working. Large-scale government aid looks like the only way to end the economic nosedive. But there’s a problem: conservative politicians, clinging to an out-of-date ideology — and, perhaps, betting (wrongly) that their constituents are relatively well positioned to ride out the storm — are standing in the way of action.

I am . . . talking about Angela Merkel, the German chancellor, and her economic officials, who have become the biggest obstacles to a much-needed European rescue plan. . . . As in the United States, monetary policy — cutting interest rates in an effort to perk up the economy — is rapidly reaching its limit. That leaves, as the only way to avert the worst slump since the Great Depression, the aggressive use of fiscal policy: increasing spending or cutting taxes to boost demand. Right now everyone sees the need for a large, pan-European fiscal stimulus.

Everyone, that is, except the Germans. Mrs. Merkel has become Frau Nein: if there is to be a rescue of the European economy, she wants no part of it, telling a party meeting that “we’re not going to participate in this senseless race for billions.” Last week Peer Steinbrück, Mrs. Merkel’s finance minister, went even further. Not content with refusing to develop a serious stimulus plan for his own country, he denounced the plans of other European nations. He accused Britain, in particular, of engaging in “crass Keynesianism.”

This seems sound thinking to me, but it does not deal with the question of how to achieve a sustainable economic recovery. Later at the FDL discussion, Krugman wrote:

We do need eventually to have growing consumer demand, but once the savings rate has risen to something more historically normal, consumption can start growing again. . . . [There is a] “secular stagnation” view — the idea of a sustained shortfall in demand, going forward from here. I guess I’d say that history is not on [the] side [of that view] — a lot of people expected persistent demand problems after WWII, and it didn’t happen. That doesn’t mean it can’t happen, but it’s not a good bet.

I suggest that the wage and income inequality situation after WWII were significantly different that they are today and that we are at much greater risk of "secular stagnation" than Krugman credits here.

Here's my point, while, prior to 1937, FDR was engaged in the type of Keynesian government stimulation - there was also a concerted effort to stimulate job creation, fight against wage stagnation (the support of unionization was key here) and against income inequality.

In that sense, we are back to an old New Deal debate - the one between Harry Hopkins, who emphasized job creation, and Harold Ickes, Sr., who emphasized investment. That debate is not occurring now and I would like to see it. Indeed, I think it is an imperative debate.

From the assignment desk (h/t Ezra Klein) - more from Mr. Krugman on this issue please.

I'm making more money now than I ever have, but I was in better financial shape when I was just a lowly grad student living off a really piddling adjunct's income - even more troubling to me, I was doing better when I was only an adjunct, and commuting to boot.

I'm constantly juggling my money anymore. Yes, it's true, I'd have more $$ if I stopped saving anything, but I have to have an emergency cushion, in case the car breaks down or the pipes burst or, as happened just last week, my iTunes account gets hacked.

I'm hearing the same thing from everyone I know, too. I don't even dare buy new shoes because the margin is that slim for me. And I'm making a good salary.

This wasn't the case even four years ago. I was a commuting adjunct living from contract to contract and making a measly amount of money - and I felt perfectly comfortable going to the store to buy some exotic food or other, or going out to eat with friends, or buying those fabulous shoes.

This year, I bought some things, but I had to take to money out of savings, which is a no-no, and not out of my paycheck.

I did so after more than a little introspection --- and, no I am not kidding.

Now, granted, I could have established a special savings account for a pair of shoes, and put that $4.95 into that savings account instead of dithering it away on 5 songs through iTunes. But I didn't. I gave into want.

But how often do I do that? It depends on your interpretation of need vs want, i suppose.

For example, about 45 minutes ago, I caved into my desire for Greek yogurt mixed with olive oil, garlic, dill, and a touch of cumin. I hadn't eaten any breakfast and I was starving and I decided that i would be a total wild woman and eat the yogurt instead of my normal two eggs (from chickens I'm personally acquainted with).

I brave the ice storm to buy milk with a coupon which will bring the cost of that milk to 29 cents.

While at the store, I note that bars of chili dark chocolate are on sale for $1/ea.

Given it's almost lunchtime, I say No, I can't possibly! then I realize I could substitute my normally healthy and homemade lunch (which has not been made yet) with a cup of strong coffee and milk and the chocolate bar and, instead of the dinner I was planning, I'll have the lunch.

It is an outrage for you to throw chocolate into this discussion when you know perfectly well (if you have read me over time) that is my opinion that chocolate is one of the four basic food groups...the others being french-roast coffee, maplenut icecream and sugar in all its forms (including fermented).

The highest form of meeting my 'needs' is defined by combining the basics, a la chocolate in my coffee = mocha, melted chocolate over the maple nut = hot fudge sundae and sugar in my Irish Coffee solves most problems for the day.

I am reminded of a recent report on NPR. They were reporting that Wal-Mart and other retailers were having a really hard time because consumer spending has dropped off. THEN they went on to suggest that Wal-Mart and others would have an even harder time because the Democrats would likley sponsor employee/labor friendly policies that would increase costs on them.

Of course, lost in all of this is that employess ARE the customers of the retailers. You can continue to pay the employees less and less, and they will buy less and less. Down down down. At some point, people have to stop worrying about Wal-mart's bottom line and start looking at the big picure. At some point, despite what big business thinks, a healthy, fairly paid working class population is good for them, not bad.

with rising health care costs. Companies that could have used money to pay employees more, were instead, having to pay ever-increasing health coverage.
UHC would provide a means for increased wages, increased consumer spending and even increased savings without a corresponding increase in company expense or cost of goods.
There can be no better "infrastructure spending" than on UHC!

she's been a little preoccupied on her right. The big debate at the recent CDU/CSU meetings was over writing into the German Constitution that the official language of Germany is German, and over debating how much to emphasize the Christian-ness of the German nation.

No, I'm not kidding.

The former is (actually both are) an anti-immigrant ideological measure, intended to discourage non-German speakers (that's spelled T-U-R-K-S, for the rest of you) from glomming onto services and all the other anti-immigrant crap we hear regularly here coalescing around English-as-the-offical-language maypole. The latter is both an anti-Muslim message - their press and behavior had been subtly, but unmistakably, anti-Muslim similar to the US media, circa 2002, but not as overt - and one designed to remove the one of the more stinging powers of the NPD and its religious war/culture war message.

The NPD, you might remember, is a far-right party that usually gets mentioned in the same sentence as "neo-Nazi". That's an accurate characterization. The NPD, skinheads and the old Nazi party share a lot of ideas about race and religion. Since there are very few Jews in Germany anymore, they have to have some Other against which to direct their angst, and it's the Muslims. There are plenty of them for the NPD (and more-conservative members of the CDU/CSU) to be mad at.

The NPD and right-extremists ("Rechtsextrimisten", in German) are particularly strong in the areas of the old East Germany - Saxony, Saxony-Anhalt and Thuringen - where unemployment is highest and a lot of the young women have left (for greener economic pastures), leaving underemployed young men and beer behind. Listening to German radio, one can hear reports of some beating, disturbance or anti-social activity by the right-extremists almost weekly. And it's usually Muslim, immigrant, or (presumably) darker-skinned person on the receiving end.

So, in addition to having to deal with the economy, Merkel has to deal with the incipient rebirth of an overtly religio-racist hard-right movement in her country, following closely upon a street-fighting model which already showed (75 yr ago or so) the way to power.

That she would be smarter to put all those underemployed young men to work and engage in a bit of Kenysianism is pretty well beyond question. I don't think she could pull it off for political reasons within her own coalition even if she were so inclined. The long and short of those reasons are that a lot of the CDU/CSU from the old West Germany cannot see the point in lending a helping hand to the still-more-depressed old East, the West's relative success in the post-war "economic miracle" having achieved a near-mythic status. It's not that different from, say, Reagan Republicans not wanting to help (And doing everything the can to hinder) minorities and the working class from rising. And, FWIW, there is no shortage of racism/ethnocentrism against the Turks and Muslims, buried, but still present.

the above poster said. It is true that the East has been doing poorly, and that in general, assimilation of Turkish and other Muslim immigrants has not gone well, but the poster basically called Ms. Merkel's party akin to neo-Nazis. That's a smear, and given Germany's history, reprehensible.

Historically, Merkel has always erred in the direction toward balancing budgets and limiting deficits. She campaigned on raising taxes, and now she is balking at spending a lot of money to stimulate the economy. This is her conservatism. I think it is wrong headed, but there is consistency to her stances.

I am listening to MDR (Mitteldeutsche Rundfunk) through the magic of streaming internet feeds. In German. Sometimes it's BR (Bayerischer Rundfunk) and sometimes it's Deutschlandfunk, but 90 plus percent of the time it's MDR. I listen to it regularly - like every darn day. News, weather, criticism and cultural programming, you name it. I have for something on the order of 5 years now - since I first bought a new computer with a fast-enough internet connection to accept streaming audio.

And, on my bookmark list I have the Suddeutsche Zeitung, Leipziger Volkszeitung, and Frankfurter Allgemeine. Sort of surprisingly, the shoe-tosser barely got a mention in the Suddeutsche....

What I presented was a synopsis of both the goings-on as reported by their media, and of the sense which could be drawn from the inflections and tone of the reporting and soundbites, as well as things like where a story is placed. Also, my synopsis looks both at the longer term trend of things as well as the short-term story du jour. It's a synthesis, based on what's reported.

You're free to disagree with me, but please be sure to recognize that - as with any foreign language news and information - not everything gets translated into English, and even that which does is subject to editing in the translation process. The cultural background that informs such reporting surely does not get translated - it takes too long and too much effort. And some of the things that get time might be surprising: how would you react if I told you that every Friday about 4 PM euro-time, MDR has a rabbi on with about a half hour of programming oriented toward Jewish listeners and toward educating Gentile listeners about Judaism? It does.

that it is Fox), the "far Right" who wanted the sentence put in about the German language, includes Germany's Central Council of Jews. I don't pretend to know every in and out here. But I have not run into the kind of nationalism we see here in the USA, in Germany. Even people who vote Christian Democrat do not sit around obsessing about how German they are.

Merkel opposes the measure. Thing is, I did hear some complaining about the Turks' German, when I lived there. Basic mistakes like using the familiar "Du" instead of the formal "Sie" (which is highly disrespectful). Not sure how you solve the problem, but I think the Germans, many of whom have mastered other languages, have the right to complain that their citizens learn or at least try to learn German. However, this resolution will do nothing to solve the problem. And given the economic emergency, it seems a waste of time.

I agree that the vast majority of Germans are not nationalist - to the extent that you see in the U.S. I think they are also wary of nationalism because of their history. I heard that having the World Cup there helped heal some wounds with regard to all that - it was the first time they have had a real sense of "healthy" nationalism in a long time.

The Turkish situation is complicated. It is the same in Germany as it is in a lot of other european countries. They are afraid of diluting their culture and language, and they have large immigrant populations who aren't "assimilating" as well as one would like. All that being said, there is certainly a fair amount of blame on both sides. Turks don't assimilate enough, but they are also not welcomed into the culture. It is hard to learn a language correctly if no one will speak to you.

Speaking as an American who often mis-used du/Sie (it's hard to remember if you're not used to the distinction, and du sounds a lot more like you), Germans for the most part were very forgiving of my mis-use, simply because I was trying...

similar to Britain. Only white people can be English (ethnicity), but anybody can be "British".

With its immigration problems, Germany either needs to create a separate but sort of equal name, or they need to explain openly to people that being German is a matter of birthright, similar to what happens in Asian countries like Korea or Japan, where there is a clear distinction.

Or they could open up like America and just accept that admittance solely by bloodline is a stupid concept.

A kid with Pakistani ancestry from Oldham is more likely to say they are English than British. Although a Pakistani from Glasgow is more likely to say they are Scottish. Whether you are British or not depends on the level of policy you are discussing or the sport. Pakistani kids in Oldham will be Pakistanis for the cricket and English for the Football. They will be British for the Olympics and Tennis. And then there's the scousers...

That is ridiculous. That is like calling Obama a socialist. The NPD is tolerated in Germany, but largely vilified. It would be the kiss of death for the Christian Democrats to be even remotely associated with the NPD.

BERLIN (AFP) -- The German government on Monday vowed to crack down on the far-right after a suspected neo-Nazi turned up at the home of a police chief and stabbed him on his doorstep, sparking nationwide outrage.

Saturday's attack, which left the officer seriously wounded, also fuelled fresh calls for the banning of a notorious far-right party.

Alois Mannichl, known for his strong stand against right-wing extremists in the southern city of Passau, was stabbed as he answered his doorbell at home.

...

The head of the federal parliament's home affairs' commission, Sebastian Edathy, said the attack showed the need to outlaw the neo-Nazi National Democratic Party (NPD), the most prominent of the legal right-wing extremist parties in Germany.

Banning the NPD "is absolutely necessary because it would help reduce the reach of the far-right for years to come," Edathy told the Neue Osnabruecker Zeitung.

In addition, "grievous bodily harm linked to far-right political motives should no longer be simply punished by suspended sentences," he added.

There has been no link established between the NPD and the Passau case.

But the NPD, a fringe group with only about 7,300 members, is the most radical of the extreme right parties in Germany with a platform which is openly anti-foreigner, racist and anti-Semitic.

It has no deputies in the Bundestag, Germany's lower house of parliament.

But it does hold seats in two regional parliaments, Saxony and Mecklenburg-Western Pomerania, both in depressed former communist east Germany.

You still gave no coherent reason why Merkel is so reluctant to back an economic stimulus package in Germany.

that within the CDU/CSU there is no shortage of people who would easily embrace what, if translated to American politics, would be a deep wingnut. E.g, some Republican of Palin's ideology but without the religiosity and a lot smarter. Merkel has to listen to those folks because, if you remember, the coalition government which made her Chancellor came about only after an extended period of negotiations. If she starts losing the right side of her party, she winds up out of a job.

To that end, she has to deal with the NPD, too. Banning them pushes them somewhere - but where, good question. Beating down their ideas offends some number of her own party colleagues, who share some set of pastel versions of the fully-saturated NPD ideas.

Economic fixes would be the best solution, but she's stuck keeping her party happy - first.

how much of the economy has been funded on credit cards and home equity loans. It is too bad that as people being forced to get smarter about those things, the economy is going to have some severe withdrawal reactions. No way to tell now how it will shake out. But getting real wages into people's hands is the only way to minimize the damage, and he government is the only organization with the ability to do that in high enough numbers right now.

The usual anecdote is that Americans and Britons like to spend on credit, while continental Europeans like to save. But it seems to me that the Anglos get the last laugh: the Germans face a downturn too, and they didn't even get excessive LCD TVs in the boomtime!

... who is totally unphased by the collapse of the stock market. My retirement is basically all cash - doubled, because my job matches - so I was counting on my money simply doubling and not much more.

Everyone else was counting on the stock market and are stunned by how much they've lost.

Furthermore, I've been cash only for years now.

I may be comparatively poor - or maybe better said, I may have been comparatively poor in comparison - but I know pretty much exactly where I stand, and I have cash savings.

between the present, and the post-wwII economy, with respect to consumption: during wwII, most of what we think of as luxury goods and big ticket items (large appliances, cars, etc) were, for the most part, not available to the general public. those resources were allocated to military use.

as well, there was a significant pool of forced savings available (if you have nothing to spend it on, you more or less are forced to save) for post-war spending. people bought those items not available during the war, to replace worn out ones, or just improve their lives.

such is not the case today. the average middle-class family has those goods already, they aren't likely to be running out and buying new ones in a year or two. that, and their savings are insignificant, having been used already to buy those goodies.

so, the only way to bump consumption of non-essentials is to increase the wages of the lower, unskilled classes, the "wal-mart" gang, if you will.

henry ford understood this basic principle: it doesn't matter how good your product is, if no one can afford to buy it.

much greater risk of "secular stagnation" than Krugman heeds. Socially it seems to me that Americans have been some crazed consuming junkies for the past ten years. As society begins addressing needs verses wants again, hopefully we will all stop acting so childlike about shiny objects and get a savings account or two. Without income inequality being addressed though I do not see any way around us experiencing secular stagnation. If we all have to be credit worthy to receive credit and credit risk madness is a thing of the past where else is there to build demand from from here?

The past 30 years at the very least. I remember one friend of mine in the early 80s telling me that his daughter and her husband (who were both in college and living off their parents) thought that 'a budget meant they coulod only buy one record/CD a week!'

Which brings me to my favorite subject...'the cost of college!' What baloney. College is not expensive. LIVING is expensive. College (tuition and fees) is cheap...best buy in the marketplace.

Do you really think that massive Keynesian spending until our overdrive consumer culture returns is a good idea? I recall quite a lot of complaining over the last 15 years that America was too greedy, too driven by consumer goods. An adjustment is painful but possibly necessary for a better sustainable future, no?

If the economic crisis is a problem of over-extension of credit and consuming more than we could afford, then how does it make sense to fuel that with government spending until someone extends cheap credit again?

As you said, upper middle class people won't be hurt by this, so their consumption habits don't matter because they will stay roughly constant.